Russia Holds Key Interest Rate at 7.25%

The Bank of Russia held its benchmark one-week repo rate at 7.25 percent on April 27th, following five consecutive cuts, saying that a weaker ruble amid geopolitical tensions will boost inflation. Still, policymakers agreed that there are no risks of inflation overshooting the bank's 4 percent target. The bank also reiterated that monetary policy will become neutral in 2018 and that inflation is expected to be 3-4 percent in late 2018 and to remain close to 4 percent in 2019.

Information Notice of Bank of Russia:

Inflation remains low, driven by long-term factors including, in the first place, a moderate recovery in domestic demand.

Consumer prices grew at the pace of 2.4% in March, and consumer price growth in April is estimated at 2.3–2.5%. The recent weekly data on inflation are indicative of a still feeble response of consumer prices to the ruble weakening. The gradual depletion of the past year’s vegetable stocks and the related growth in imports contributed to an expected slight increase in both monthly and annual inflation between March and April, relative to February.

In March, household inflation expectations dropped to a historical low of 7.8%. That said, uncertainty is in place over how inflation expectations will respond to the April developments in financial markets.

The Bank of Russia estimates that the ruble weakening will quicken inflation movement to 4% without the risks of overpassing this level, unless the external environment changes considerably. Inflation is forecast to range between 3–4% as of the end of 2018 and hold close to 4% in 2019.

The Bank of Russia registers a rise in inflation risks triggered by some internal and external factors. First, geopolitical factors and accelerated yield growth in advanced economies may cause surges in volatility in financial markets and affect expectations for the exchange rate and inflation. Furthermore, uncertainty still persists over the dimensions of fiscal decisions, which are needed to estimate the impact of such decisions on inflation.

The Bank of Russia leaves unchanged its estimates of risks associated with consumer and oil price volatility, wage movements and possible changes in consumer behaviour.

In its key rate decision-making the Bank of Russia will be guided by assessments of inflation risks, inflation dynamics and economic developments against the forecast.

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